Medical MalpracticeSOUTH CAROLINA MEDICAL MALPRACTICE PATIENTS' COMPENSATION FUND BALANCE SHEET JUNE...

SOUTH CAROLINA MEDICAL MALPRACTICE

PATIENTS' COMPENSATION FUND

BALANCE SHEET JUNE 30, 2001

ASSETS Current Assets: Cash and cash equivalents $ 12,067,674 Interest receivable 197,896 Total Current Assets 12,265,570 Fixed Assets: Equipment 33,349 Accumulated depreciation (30,624) Net 2,725 Total Assets $ 12,268,295

LIABILITIES AND FUND EQUITY Current Liabilities: Accounts payable $ 2,470 Accrued salaries and employer contributions 14,152 Accrued compensated absences 20,812 Unearned fees 8,800,000 Total Current Liabilities 8,837,434 Noncurrent Liabilities: Claims: Reported 43,810,000 Incurred but not reported 141,184,546 184,994,546 Claims liability discount (32,093,542) Net Claims Liability 152,901,004 Total Noncurrent Liabilities 152,901,004 Total Liabilities 161,738,438 Fund Equity: Retained earnings (deficit) (149,470,143) Total Liabilities and Fund Equity $ 12,268,295

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS FINANCIAL STATEMENT

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STATEMENT OF REVENUES, EXPENSES AND CHANGES IN RETAINED EARNINGS

FOR THE YEAR ENDED JUNE 30, 2001 Operating Revenues: Members fee income (Net of refunds) $ 17,258,430 Deficit assessment income 15,713,626 Interest earned 1,763,295 Total Operating Revenues 34,735,351 Operating Expenses: Claims (net of discounts) 82,558,065 Administration 263,951 Depreciation 3,222 Total Operating Expenses 82,825,238 Net Income (Loss) (48,089,887) Retained Earnings (Deficit) - July 1 (101,380,256) Retained Earnings (Deficit) - June 30 $ (149,470,143)


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STATEMENT OF CASH FLOWS FOR THE YEAR ENDED JUNE 30, 2001

Cash Flows From Operating Activities: Net income (Loss)* $ (48,089,887) Adjustments to reconcile net income to net cash provided by operating activities: Interest reported as operating income, reclassified to investing activities (1,763,295) Depreciation 3,222 Increase (decrease) in liabilities: Accounts payable 1,644 Claims liabilities, net of discount 41,389,004 Accrued salaries and employer contributions 3,982 Accrued compensated absences 524 Unearned fees 1,075,000 Total Adjustments 40,710,081 Net Cash Used by Operating Activities (7,379,806) Cash Flows From Capital and Related Financing Activities: Acquisition of equipment (1,097) Cash Used by Capital and Related Financing Activities (1,097) Cash Flows From Investing Activities: Interest received 1,841,331 Cash Provided by Investing Activities 1,841,331 Net Increase (Decrease) in Cash and Cash Equivalents (5,539,572) Cash and Cash Equivalents, Beginning of Year 17,607,246 Cash and Cash Equivalents, End of Year $ 12,067,674 Supplementary Disclosures: Cash flows from operating activities: Cash paid for claims $ 41,169,061 Cash Received for Fees and Deficit Assessment Net of Refunds Paid $ 34,047,056 * For purposes of this financial statement net income or loss and operating income or loss are the same.


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NOTES TO FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2001

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Reporting Entity The core of the financial reporting entity is the primary government which has a separately elected governing body. As required by generally accepted accounting principles, the financial reporting entity includes both the primary government and all its component units. Component units are legally separate organizations for which the elected officials of the primary government are financially accountable. In turn, component units may have component units. An organization other than a primary government may serve as a nucleus for a reporting entity when it issues separate financial statements. The Organization is identified herein as the primary entity. The primary entity is financially accountable if it appoints a voting majority of the organization's governing body including situations in which the voting majority consists of the primary entity's officials serving as required by law (e.g., employees who serve in an ex officio capacity on the component unit's board are considered appointments by the primary entity) and (1) it is able to impose its will on that organization or (2) there is a potential for the organization to provide specific financial benefits to, or impose specific financial burdens on, the primary entity. The primary entity also may be financially accountable if an organization is fiscally dependent on it even if it does not appoint a voting majority of the board. An organization is fiscally dependent on the primary entity that holds one or more of the following powers: (1) Determine its budget without another government's having the authority to

approve and modify that budget. (2) Levy taxes or set rates or charges without approval by another government. (3) Issue bonded debt without approval by another government. Based on the application of the above criteria, no component units are included in the reporting entity. The South Carolina Medical Malpractice Patients' Compensation Fund was established by Section 38-79-420 of the Code of Laws of South Carolina on July 1, 1976. The South Carolina Medical Malpractice Patients' Compensation Fund is part of the primary government of the State of South Carolina and is included in the Comprehensive Annual Financial Report of the State of South Carolina.

SOUTH CAROLINA MEDICAL MALPRACTICE PATIENTS’ COMPENSATION FUND NOTES TO FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2001 (Continued)

The Board of Governors, whose members are appointed by the Governor, is the governing body of the South Carolina Medical Malpractice Patients' Compensation Fund. The Board was created to manage and operate the Fund. The Board has the authority to set annual membership fees and to make deficit assessments when insufficient money is available to pay the Fund’s liabilities. The Board also has the authority to approve and pay claims liabilities and to actively defend the Fund against claims. The coverage is available to any public or private health care provider in the State. The Fund is responsible for payment of that portion of any covered medical malpractice claim, settlement, or judgment which is in excess of $100,000 per incident or in excess of $300,000 in the aggregate for one year. Effective November 26, 2000, excess coverage thresholds increased to $200,000 and $600,000. Although the reporting entity operates somewhat autonomously it lacks full corporate powers. The accompanying financial statements present the financial position, results of operations, and cash flows solely of the South Carolina Medical Malpractice Patients' Compensation Fund and do not include any component units or other agencies or funds of the State of South Carolina. Fund Accounting The government uses funds to report its financial position and the results of its operations. Fund accounting is designed to demonstrate legal compliance and to aid financial management. A fund is a separate fiscal and accounting entity with a self-balancing set of accounts recording cash and other financial resources, together with related liabilities and residual equities or balances and changes therein, which are segregated to carry on specific activities or attain certain objectives in accordance with applicable regulations, restrictions, or limitations. All financial transactions in the financial statements have been reported by fund.

Proprietary Funds - are used to account for activities similar, to those found in the private sector, where the determination of net income is necessary or useful to sound financial administration. Generally, when services from such activities are primarily provided to outside parties, the funds are classified as enterprise funds. All activities and accounts are classified in an enterprise fund of the proprietary fund category.

Enterprise Fund - accounts for activities that are self-sustaining, primarily through user charges, or are used when management wants to control or measure costs of services.

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SOUTH CAROLINA MEDICAL MALPRACTICE PATIENTS' COMPENSATION FUND NOTES TO FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2001 (Continued)

The South Carolina Medical Malpractice Patients' Compensation Fund was created by act of the General Assembly for the purpose of providing funds for payment of that portion of any medical malpractice claim, settlement or judgment against a health care provider which until November 26, 2000, was in excess of $100,000 per incident, and $300,000 in the aggregate, and which thereafter is in excess of $200,000 per incident or in excess of $600,000 in the aggregate for one year. The Fund is liable only for payment of claims against "licensed health care providers' which includes physicians and surgeons, directors, officers and trustees of hospitals; nurses; oral surgeons; dentists; pharmacists; chiropractors; hospitals; nursing homes; or any similar category of licensed health care providers. All providers licensed in South Carolina are eligible to participate in the Fund upon remitting the annual assessment fees in amounts as determined by the governing board of the Fund. Basis of Accounting All proprietary funds are accounted for on a flow of economic resources measurement focus. With this measurement focus, all assets and all liabilities associated with the operation of those funds are included on the balance sheet. Proprietary fund-type operating statements present increases and decreases in net total assets. The financial statements are presented on the accrual basis of accounting for measuring financial position and results of operations. Proprietary fund type revenues and expenses are recognized on the accrual basis of accounting. Revenues are recognized in the accounting period in which they are earned and become measurable; expenses are recognized in the period incurred, if measurable. The Government Accounting Standards Board (GASB) is the recognized standard setting body for generally accepted accounting principles in the United States of America applicable to governmental proprietary activities. The Fund applies all applicable Government Accounting Standards Board (GASB) pronouncements and all applicable Financial Accounting Standards Board (FASB) pronouncements issued on or before November 30, 1989 when not in conflict with (GASB) pronouncements. In accordance with GASB Statement 20, the Fund has elected not to implement FASB Statements 103 and after. As discussed later, the Fund uses FASB 60, guidance to record unpaid claims liabilities. Budget Policy The South Carolina Medical Malpractice Patients' Compensation Fund is granted an annual appropriation for administrative operating purposes by the General Assembly. The appropriation as enacted becomes the legal operating budget for the Fund for its budgeted activities. The Appropriation Act authorizes expenditures from funds appropriated from the General Fund of the State and expenditures of total

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funds. None of the funding of the South Carolina Medical Malpractice Patients' Compensation Fund is provided from State General Fund appropriations. The General Assembly enacts the budget through passage of line-item appropriations by program within budgetary unit. Budgetary control is maintained at the line-item level of the budgetary entity. Agencies may process disbursement vouchers in the State's budgetary accounting system only if enough cash and appropriation authorization exist. Transfers of funds may be approved by the State Budget and Control Board under its authority or by the agency as set forth in the 2001 Appropriation Act Proviso 72.14 as follows: Agencies are authorized to transfer appropriations within programs and within the agency with notification to the Division of Budget and Analyses and the State Comptroller General. No such transfer may exceed twenty percent of the program budget. Transfers from personal services accounts or from other operating accounts may be restricted to any level set by the Board. During the fiscal year-end closeout period in July, agencies may continue to charge vendor, interagency, and interfund payments for the fiscal year to that fiscal year's appropriation. For the Fund, any unexpended funds as of June 30, automatically carry over to the ensuing fiscal year. State law does not require the use of encumbrance accounting. State law does not precisely define the budgetary basis of accounting. The current Appropriation Act states that the General Assembly intends to appropriate all State funds and to authorize and/or appropriate the use of all other monies to operate State government for the current fiscal year. The State's annual budget is prepared primarily on the modified accrual basis of accounting with several exceptions, principally the cash disbursements basis for payroll expenditures. The budget and actual comparison in Note 2 presents actual expenses on the budgetary basis of accounting compared to the legally adopted and modified budget on a line-item expense basis for the Fund's administrative costs. The level of legal control for each agency is reported in a publication of the State Comptroller General's Office titled A Detailed Report of Appropriations and Expenditures for each fiscal year. Cash and Cash Equivalents The amounts shown in the financial statements as "cash and cash equivalents" represent cash on hand and cash on deposit with the State Treasurer and cash invested in various investments by the State Treasurer as part of the State's internal cash management pool. Because the State’s internal cash management pool operates as a demand deposit account, amounts invested in the pool are classified as cash and cash

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equivalents. The pool includes some long-term investments such as obligations of the United States and certain agencies of the of the United States, obligations of the State of South Carolina and certain of its political subdivisions, certificates of deposit, collateralized repurchase agreements, and certain corporate bonds. Most State agencies participate in the State’s internal cash management pool; however, some agency accounts are not included in the pool because of restrictions on the use of funds. For those accounts, cash equivalents included investments in short-term, highly liquid securities having a maturity at the time of purchase of three months or less. The State's internal cash management pool consists of a general deposit account and several special deposit accounts. The State records each agency's equity interest in the general deposit account; however, all earnings on that account are credited to the General Fund of the State. Agencies record and report their deposits in the general deposit account at cost. However, agencies report their deposits in the special deposit accounts at fair value. Investments in the pool are recorded at fair value. Interest earned by the agencys' special deposit accounts is posted to the agency's account at the end of each month and is retained by the agency. Interest earnings are allocated based on the percentage of an agency's accumulated daily interest receivable to the total undistributed interest received by the pool. Reported interest income includes interest earnings, realized gains/losses and unrealized gains/losses on investments in the pool arising from changes in fair value. The South Carolina Medical Malpractice Patients’ Compensation Fund only has special deposit accounts. Realized gains and losses are allocated daily and are included in the accumulated income receivable. Unrealized gains and losses are allocated at year-end based on the agency’s percentage of ownership in the pool. Although the State’s internal cash management pool includes some long-term investments, it operates as a demand deposit account; therefore, for credit risk information pertaining to the internal cash management pool, see the deposits disclosures in Note 3. Fixed Assets Equipment acquisitions require the use of fund financial resources and are for amounts in excess of $250 capitalized at cost in the Fund upon acquisition. Depreciation of equipment is charged as an expense against operations, and accumulated depreciation is reported on the Fund's balance sheet. Depreciation has been provided over estimated useful lives of 5-10 years using the straight-line method of depreciation. Compensated Absences Generally all permanent full-time State employees and certain part-time employees scheduled to work at least one-half of the agency’s workweek are entitled

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to accrue and carry forward at calendar year-end a maximum of 180 days sick leave and 45 days annual vacation leave. Upon termination of State employment, employees are entitled to be paid for accumulated unused annual vacation leave up to the maximum of 45 days, but are not entitled to any payment for unused sick leave. The South Carolina Medical Malpractice Patients' Compensation Fund calculates the gross compensated absences liability based on recorded balances of unused leave. The entire unpaid liability for which the employer expects to compensate employees through paid time off or cash payments, inventoried at fiscal year-end current salary costs and the cost of the salary-related benefit payments is recorded as a current liability. The net change in the liability is recorded in the current year in the applicable administrative expense categories. Statement of Cash Flows For purposes of this statement the South Carolina Medical Malpractice Patients' Compensation Fund considers investments with the State of South Carolina’s internal cash management pool to be cash equivalents because they are readily convertible to cash with an insignificant risk of loss in value. Unpaid Claims Liabilities In years prior to July 1, 1993, the Fund had been classified as risk sharing, public entity risk pool (PERP), Governmental Accounting Standards Board's Statement Number 10 Accounting and Financial Reporting for Risk Financing and Related Insurance Issues. Effective July 1, 1993, the Fund is considered an insurance enterprise which follows the guidance of FASB Statements No. 60, Accounting and Reporting by Insurance Enterprises. This change was due to the fact that the Medical Malpractice Patients' Compensation Fund is primarily composed of non-governmental entities, and one of the key characteristics of (PERP) is that it is composed of primarily governmental entities. This change had no effect on the method of accounting for unpaid claims liabilities. Certain supplemental disclosures required by GASB 10 are not required under FASB 60, therefore they are not included in this report. The Fund actuarially establishes claims liabilities based on estimates of the ultimate cost of claims that have been reported but not settled, and of claims that have been incurred but not reported. The Fund, because it carries only excess liability coverage does not incur claim adjustment expenses. The length of time for which claims costs must be estimated varies depending on the coverage involved. Because actual claims costs depend on such complex factors as medical technology changes in doctrines of legal liability, and damage awards, the process used in computing claims liabilities does not necessarily result in an exact amount. Claims liabilities are recomputed annually using a variety of actuarial and statistical techniques to produce current estimates that reflect recent settlements, claim frequency, and other economic and social factors. A provision for inflation in the

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calculation of estimated future claims costs is implicit in the calculation because reliance is placed both on actual historical data that reflect past inflation and on other factors that are considered to be appropriate modifiers of past experience. An actuarial study is performed annually by an independent actuary with the latest done in August, 2001 for the current year. Adjustments to claims liabilities are charged or credited to expense in the periods in which they are made. No claims payable are reported as current liabilities because of the uncertainty of when they will be paid and the length of time to litigate and/or determine liabilities of individual claims. Claims liabilities are discounted based upon the Fund’s payment experience and interest rates on cash equivalents held. The discounted liabilities provides the amount needed at the date of computation to fund liabilities that are expected to be paid in future years. Revenue Recognition The Fund receives fees from members, the fee pays for coverage for a year. Due to the various effective anniversary dates a provision for unearned fees at the end of every year is estimated. The computation of unearned fees is based upon the amount of the fees and the effective membership dates for participants. This is done to recognize revenue during the coverage period. When warranted, the Fund may make deficit assessments which are recognized as revenue on the date of the assessment. Due to the nature of the coverage of the members refunds are often warranted. These occur because of policy holder change of personnel and/or change of information provided by the policy holders relating to employees and their ratings. Refunds are recognized in the year of the refund. These adjustments are taken into consideration in computation of the unearned fees liability. Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

NOTE 2 - BUDGET COMPARISON TO ACTUAL

The Administration expenses shown on the statement of revenues, expenses and changes in retained earnings are reported on the accrual basis of accounting which differs from the legally enacted budgetary basis. The amounts shown below reflect

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the adjustments from the GAAP basis to actual on the budgetary basis for the year ended June 30, 2001. Adjustments of the GAAP basis of accounting to the budgetary basis consist of reversals of payroll accruals, accrued annual leave and the related fringe benefits and of reflecting equipment acquisitions as expenditures.

Administration Expenses Per Statement of Revenues, Expenses and Changes in Retained Earnings $ 263,951 Adjustments to Budgetary Basis: Equipment purchased and capitalized 1,097 Net Accruals: Personal services (3,981) Compensated absences (524) Total Actual on Budgetary Basis $ 260,543

The Administration expenses shown below are presented on the budgetary basis compared to the legally adopted and modified budget by object code category. LEGAL ACTUAL ON VARIANCE BASIS BUDGETARY FAVORABLE FISCAL YEAR 2001 BUDGET BASIS (UNFAVORABLE) Personal Services $ 188,145 $ 122,646 $ 65,499 Employer Contributions 44,602 27,828 16,774 Other Operating Expenses 110,258 110,069 189 Total $ 343,005 $ 260,543 $ 82,462

NOTE 3 - DEPOSITS AND INVESTMENTS

All deposits of South Carolina Medical Malpractice Patients' Compensation Fund are under the control of the State Treasurer who, by law, has sole authority for investing State Funds. State law requires full collateralization of all State Treasurer bank balances. The State Treasurer must correct any deficiencies in collateral within seven days. At June 30, 2001, all State Treasurer bank balances were fully insured or collateralized with securities held by the State or by its agents in the State's name. With respect to investments in the State's internal cash management pool, all of the State Treasurer's investments are insured or registered or are investments for which the securities are held by the State or its agent in the State's name. Information pertaining to the reported amounts, fair values, and credit risk of the State Treasurer's investments is disclosed in the Comprehensive Annual Financial Report of the State of South Carolina.

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SOUTH CAROLINA MEDICAL MALPRACTICE PATIENTS' COMPENSATION FUND NOTES TO FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2001 (Continued) NOTE 4 - CLAIMS LIABILITIES

Because medical malpractice liability insurance covers claims occurring during the coverage period and claims emerge over a long period of time and because the Fund has limited claims experience history, provisions for estimated losses incurred but not reported and claims reported but not settled are based on an actuarial formula which is used to estimate the ultimate incurred losses. An independent actuary does an actuarial study each year to determine these liabilities. As a result of the actuarial study as of June 30, 2001 net discounted liabilities for claims at June 30, 2001 were $41,389,004 greater than those at June 30, 2000. As discussed in Note 1, the Fund establishes a liability for both reported and unreported insured events, which includes estimates of future payment of losses. The following represents changes in those aggregate liabilities for the last two years. Reconciliation of Claims Liabilities 2001 2000 Unpaid claims at beginning of the fiscal year $ 151,575,000 $ 33,801,000 Incurred Claims: Provision for insured events of the current fiscal year 42,000,659 26,495,000 Increases (decreases) in provisions for insured events of prior fiscal years 32,587,948 109,774,365 Total Incurred Claims 74,588,607 136,269,365 Payments of claims: Attributable to events of current fiscal year - - Attributable to events of prior fiscal years (41,169,061) (18,495,365) Unpaid claims at end of the fiscal year $ 184,994,546 $ 151,575,000 The schedule above is the undiscounted liabilities for both years. The total discount in 2001 was $32,093,542, and was $40,063,000 in 2000. The claims liabilities were discounted at a 5% rate for both 2001 and 2000.

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SOUTH CAROLINA MEDICAL MALPRACTICE PATIENTS' COMPENSATION FUND NOTES TO FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2001 (Continued) NOTE 5 - PENSION PLAN AND OTHER EMPLOYEE BENEFITS

Pension Plan The Retirement Division of the State Budget and Control Board maintains four independent defined benefit plans and issues its own publicly available Comprehensive Annual Financial Report (CAFR) which includes financial statements and required supplementary information. A copy of the separately issued CAFR may be obtained by writing to the Retirement Division, 202 Arbor Lake Drive, Columbia, South Carolina, 29223. Furthermore, the Division and the four pension plans are included in the CAFR of the State of South Carolina. Substantially all employees of the South Carolina Medical Malpractice Patients’ Compensation Fund are covered by a pension plan through the South Carolina Retirement System (SCRS), a cost-sharing multiple-employer defined benefit pension plan administered by the Retirement Division, a public employee retirement system. Generally all State employees are required to participate in and contribute to the SCRS as a condition of employment unless exempted by law as provided in Section 9-1-480 of the South Carolina Code of Laws. This plan provides retirement annuity benefits as well as disability, cost of living adjustment, death, and group-life insurance benefits to eligible employees and retirees. Under SCRS, employees are eligible for a full service retirement annuity upon reaching age 65 or completion of 28 years credited service regardless of age. The benefit formula for full benefits effective since July 1, 1989, for the SCRS is 1.82 percent of an employee’s average final compensation multiplied by the number of years of credited service (five years effective January 1, 2001). Early retirement options with reduced benefits are available as early as age 55. Employees are vested for a deferred annuity after five years service and qualify for a survivor’s benefit upon completion of 15 years credited service. Disability annuity benefits are payable to employees totally and permanently disabled provided they have a minimum of five years credited service (this requirement does not apply if the disability is the result of a job related injury). A group-life insurance benefit equal to an employee’s annual rate of compensation is payable upon the death of an active employee with a minimum of one year of credited service. Effective January 1, 2001, Section 9-1-2210 of the South Carolina Code of Laws allows employees eligible for service retirement to participate in the Teacher and Employee Retention Incentive (TERI) Program. TERI participants may retire and begin accumulating retirement benefits on a deferred basis without terminating employment for up to five years. Upon termination of employment or at the end of the TERI period, whichever is earlier, participants will begin receiving monthly service retirement benefits which will include any cost of living adjustments granted during the TERI period. Because participants are considered retired during the TERI

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period, they do not make SCRS contributions, do not earn service credit, and are ineligible to receive group life insurance benefits or disability retirement benefits. Since July 1, 1988, employees participating in the SCRS have been required to contribute 6.0 percent of all compensation. Effective July 1, 2000, the employer contribution rate was 10.07 percent which included a 2.52 percent surcharge to fund retiree health and dental insurance coverage. The Fund’s actual contributions to the SCRS for the fiscal year ended June 30, 2001 were $8,313, and equaled the required contributions of 7.55 percent (excluding the surcharge) for the year. Employer contributions for fiscal year 2000 were $10,389 and for fiscal year 1999 were $10,707. Also, the Fund paid employer group-life insurance contributions of $165 in the current fiscal year at the rate of .15 percent of compensation. The amounts paid by Fund for pension and group-life benefits are reported as employer contribution expenditures in Note 2. Article X, Section 16, of the South Carolina Constitution requires that all State operated retirement systems be funded on a sound actuarial basis. Title 9 of the South Carolina Code of Laws of 1976, as amended, prescribes requirements relating to membership, benefits, and employee/employer contributions for each pension plan. Employee and employer contribution rates to SCRS are actuarially determined. The surcharges to fund retiree health and dental insurance are not part of the actuarially established rates. Annual benefits, payable monthly for life, are based on length of service and on average final compensation (an annualized average of the employee’s highest 12 consecutive quarters of compensation). The System does not make separate measurements of assets and pension liabilities for individual employers. Under Title 9 of the South Carolina Code of Laws, the Fund’s liability under the plan is limited to the amounts of contributions (stated as a percentage of covered payroll) established by the State Budget and Control Board. Therefore, the Fund’s liability under the pension plan is limited to the contribution requirements for the applicable year from amounts appropriated therefore in the South Carolina Appropriation Act and amounts from other applicable revenue sources. Accordingly, the Fund recognizes no contingent liability for unfunded costs associated with participation in the plan. At retirement, employees participating in the SCRS receive additional service credit (at a rate of 20 days equals one month of service) for up to 90 days for accumulated unused sick leave. Post-Employment and Other Employee Benefits In accordance with the South Carolina Code of Laws and the annual Appropriation Act, the State of South Carolina provides certain health care, dental, and life insurance benefits to active and certain retired State employees and certain

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surviving dependents of retirees. All permanent full-time employees of South Carolina Medical Malpractice Patients’ Compensation Fund are eligible to receive these benefits. The State provides post employment health and dental benefits to employees who retire from State service or who terminated with at least 20 years of State service who meet one or more of the eligibility requirement, such as age, length of service, and hire date. Generally those who retire must have at least 10 years of retirement service credit to qualify for State-funded benefits. Benefits are effective at date of retirement when the employee is eligible for retirement benefits. These benefits are provided through the Fund’s applicable revenue sources for active employees and the State Budget and Control Board for all participating State retirees except the portion funded through the pension surcharge and provided from other applicable revenue sources of the Fund for its active employees who are not funded by State General Fund appropriations. The State finances health and dental plan benefits on a pay-as-you-go basis. Currently, approximately 20,000 State retirees meet these eligibility requirements. The South Carolina Medical Malpractice Patients’ Compensation Fund recorded employer contribution expenses for these insurance benefits for active employees in the amount of $6,551 for the year ended June 30, 2001. As the retiree health/dental benefits discussed above, the Fund paid $2,775 applicable to the surcharge described above which is included with the employer contributions for retirement benefits. These amounts were remitted to the South Carolina Retirement Systems for distribution to the Office of Insurance Services for retiree health and dental insurance benefits. Information regarding the cost of insurance benefits applicable to the South Carolina Medical Malpractice Patients’ Compensation Fund retirees is not available. By State law, the South Carolina Medical Malpractice Patients’ Compensation Fund has no liability for retirement benefits. Accordingly, the cost of providing these benefits for retirees is not included in the accompanying financial statements. In addition, the State General Assembly periodically directs the Retirement Systems to pay supplemental (cost of living) increases to retirees. Such increases are primarily funded from System's earnings; however, a portion of the required amount is appropriated from the State General Fund annually for the SCRS benefits. Deferred Compensation Plans Several optional deferred compensation plans are available to State employees and employers of its political subdivisions. Certain employees of the agency have elected to participate. The multiple-employer plans, created under Internal revenue code sections 457, 401(k), and 403(b) are administered by third parties and are not included in the Comprehensive Annual Financial Report of the State of South Carolina. Compensation deferred under the plans is placed in trust for the

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contributing employee. Employees may withdraw the current value of their contributions when they terminate State employment. Employees may also withdraw the current value of their contributions prior to termination if they meet requirements specified by the applicable plan. The State has no liability for losses under the plans. The State authorized deferred compensation matching contributions for fiscal year 2000-2001. The contributions are funded from various funding sources based on the same percentages used for employees’ salaries. The State appropriated funds from unspent fiscal year 1999-2000 appropriations for the portion of contributions paid from State General Funds to 401(k) accounts of eligible state employees. The 401(k) match is limited to $300. To be eligible an employee must be a permanent full-time State employee or temporary grant employee who is actively contributing to a 401(k), 457, or 403(b) account on the date of distribution. Permanent full-time employees making less than $20,000 as of July 1, 2000, are not required to contribute in order to receive the match. The Patients Compensation Fund contributed $300 for all employees in the year ended June 30, 2001, which was paid from other sources.

NOTE 6 - TRANSACTIONS WITH STATE ENTITIES

The South Carolina Medical Malpractice Patients' Compensation Fund has significant transactions with the State of South Carolina and various other State agencies. Services received at no cost from State agencies include maintenance of certain accounting records and payroll and disbursement processing from the Comptroller General: check preparation, banking functions from the State Treasurer, and legal services from the Attorney General. Other services received at no cost from the various divisions of the State Budget and Control Board include retirement and health plan administration, audit services, personnel management, assistance in the preparation of the State Budget, procurement services, property management and record keeping, review and approval of certain budget amendments and other centralized functions. The South Carolina Medical Malpractice Patients' Compensation Fund also had financial transactions with various State agencies during the fiscal year. Significant payments were made to divisions of the State Budget and Control Board for office supplies, telephone, interagency mail, and data processing services. The amounts of 2001 expenses applicable to related party transactions are not readily available. The South Carolina Medical Malpractice Patients' Compensation Fund provided no services free of charge to other State agencies during the fiscal year.

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SOUTH CAROLINA MEDICAL MALPRACTICE PATIENTS' COMPENSATION FUND NOTES TO FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2001 (Continued) NOTE 7 - RESTRICTION ON PAYMENT OF CLAIMS

In the event the South Carolina Medical Malpractice Patients' Compensation Fund incurs a liability exceeding $200,000 to any person under a single occurrence, the South Carolina Medical Malpractice Patients' Compensation Fund may not pay more than $200,000 per year until the claim has been paid in full. However, the Board of Governors of the South Carolina Medical Malpractice Patients' Compensation Fund may authorize payments in excess of $200,000 per year so as to avoid payment of interest. Prior to November 26, 2000, the above amounts would have been $100,000.

NOTE 8 - LEASES The South Carolina Medical Malpractice Patients' Compensation Fund leases its office space and certain equipment under operating leases. The obligations under these leases having remaining noncancelable terms of more than one year as of June 30, 2001, are as follows:

FOR THE YEAR

ENDING JUNE 30 2002 $ 28,768 2003 29,174 2004 30,180 Total $ 88,122 A copier was leased effective January 1, 1997 for five years. The monthly payment for the copier is $100. In July 1999 a lease was extended obligating South Carolina Medical Malpractice Patients' Compensation Fund to a five year rental for commercial office space. The monthly payments required under the lease are $2,264 per month, for fiscal year 2001 with annual increases each year for the remaining three years of the lease extension which are included in the above projections. During fiscal year 2001, the South Carolina Medical Malpractice Patients' Compensation Fund recorded payments under operating leases of $28,362.

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SOUTH CAROLINA MEDICAL MALPRACTICE PATIENTS' COMPENSATION FUND NOTES TO FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2001 (Continued) NOTE 9 - UNEARNED MEMBERS FEES

Unearned fees liability at June 30, 2001 is $8,800,000 for unearned fees based on advance payment of fees. Effective June 1, 2001, the Fund began allowing members to pay their fees quarterly.

NOTE 10 - RISK MANAGEMENT

The Fund is exposed to various risks of loss and maintains State or commercial insurance coverage for certain risks. Management believes such coverage is sufficient to preclude any significant uninsured losses to the Fund. The Fund has not had any claims in the past three years. There were no significant reductions in insurance coverage from coverage in the prior year. the Fund pays insurance premiums to certain other State agencies and commercial insurers to cover risk that may occur in normal operations. The insurers promise to pay to or on behalf of the insured for covered premium losses sustained during the policy period in accord with the insurance policy and benefit program limits. Several State funds accumulate assets and the State itself assumes substantially all risks for the following: 1. Claims of covered employees for health and dental insurance benefits (Office of

Insurance Services); and 2. Claims of covered public employees for long-term disability and group-life

insurance benefits (Office of Insurance Services). 3. Claims of covered public employees for workers’ compensation insurance

benefits (State Accident Fund). 4. Claims of covered public employees for unemployment compensation insurance

benefits (Employment Security Commission). The Fund and other entities pay premiums to the states Insurance Reserve Fund (IRF) which issues policies, accumulate assets to cover the risks of loss and pays claims incurred for covered losses related to the following Fund assets, activities, and/or events. 1. Personal property and equipment - Eighty percent of each loss is covered by the

IRF. Losses are subject to a $250 deductible. 2. Data processing equipment - Coverage is up to $100,000 per loss with a $250

deductible. 3. Torts

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The IRF is a self insurer and purchases reinsurance to obtain certain services and specialized coverage and to limit losses in the areas of property, boiler and machinery, and automobile liability. The IRF’s rates are determined actuarially. State agencies are the primary participants in the State’s Health and Disability Insurance Fund and in the IRF. The Fund does not purchase insurance coverage for employee fidelity bond insurance coverage arising from theft or misappropriations. Management believes based on exposure and likelihood of loss that this coverage is not necessary. The Fund has not incurred any expenditures for the past three years for losses from employee theft or misappropriations. The Fund has not recorded any estimated losses or expense related to the deductible or policy limits because there is no evidence of asset impairment or other information to indicate a loss should be recorded.

NOTE 11 - NET LOSS AND RETAINED EARNINGS DEFICIT The Fund has experienced large operating losses for the last several year’s, including $48,089,887 for the current year, which has resulted in a retained earnings deficit. The operating losses have been attributable to large increases in paid and reported claims, which has substantially effected the actuarial determination of claims liabilities. Contributing factors are that the Funds coverage is unlimited and the fund does not purchase reinsurance to help defray the effect of large individual claims. As a result the Fund has increased fees effective June 1, 1997, June 1, 1998, June 1, 1999 and effective June 1, 2001, the Board increased fees by approximately 91%. Also, the Fund if needed can assess members additional fees. This authority was exercised in April, 1998. The April 1998 special assessment approximated $7,450,000. Also in September, 2000, the Fund did another special assessment which amounted to approximately $16,000,000. To conserve cash, if necessary, the Fund can restrict payment of claims as discussed in Note 7. Also as noted in Note 1, the threshold for covered losses has increased to $200,000 and $600,000.

NOTE 12 - FUTURE ADOPTION OF ACCOUNTING PRONOUNCEMENT The Governmental Accounting Standards Board has issued Statement No. 34 Basic Financial Statements and Management’s Discussion and Analysis – for State and Local Governments. This new accounting and reporting standard will impact the revenue and expenditure recognition and assets, liabilities, and fund equity reporting for the fiscal year beginning July 1, 2001.

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Medical MalpracticeSOUTH CAROLINA MEDICAL MALPRACTICE PATIENTS' COMPENSATION FUND BALANCE SHEET JUNE...

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